We are sharing with you an important judgment of the Hon’ble Delhi High Court in the case of Travelite (India) Vs. Union of India & Ors. [W.P. (C) 3774/2013, C.M. No. 7065/2013] on the following issue:
- Whether Rule 5A(2) of the Service Tax Rules, 1994 is ultra vires the provisions of the Finance Act, 1994 (“the Finance Act”)?
- Whether CBEC Instruction No: F.No.137/26/2007-CX.4 dated January 1, 2008 regarding Audit by Department is contrary to the Finance Act?
Facts & background:
In the instant case, Travelite (India) (“the Petitioner”) is a registered service tax assessee. The Petitioner received a letter from the Commissioner of Service tax dated November 7, 2012 (“the Letter”) which sought its records for the years 2007-08 to 2011-12 for scrutiny by an audit party under Rule 5A(2) of the Service Tax Rules, 1994 (“the Service Tax Rules”). The Petitioner being aggrieved by the Letter filed a writ petition before the Hon’ble High Court of Delhi challenging the validity of Rule 5A(2) of the Service Tax Rules brought into force vide Notification No. 45/2007-ST dated December 28, 2007 as well as the CBEC Instruction F. No. 137/26/2007-CX.4 dated January 1, 2008 (“the Instruction”).
Contentions of the Petitioner:
The Petitioner contended that an assessing officer can call for records in respect of any period during which the Department seeks to intensively scrutinize receipts, etc., i.e. under a Special Audit under Section 72A of the Finance Act. It was further argued by the Petitioner that the Finance Act does not contain any substantive power to call for records for scrutiny as is permissible under Rule 5A(2) of the Service Tax Rules or for the purpose of scrutiny by any authority outside of those created under the Finance Act, such as the Comptroller and Auditor General’s office.
Furthermore, the Petitioner submitted that the Rule 5A(2) of the Service Tax Rules is not within the rule making power conferred under Section 94 of the Finance Act and is squarely inconsistent with Section 72A of the Finance Act. Moreover, the handing over of records to an audit party cannot be governed by a non-statutory instrument like the Service Tax Audit Manual. The Petitioner also challenged the Instruction issued by CBEC.
Rule 5A(2) of the Service Tax Rules: It requires the assessee to provide records to an audit party, which reads as under:
"Rule 5A. Access to a registered premises.
(1) An officer authorised by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.
(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be,-
(i) the records as mentioned in sub-rule (2) of rule 5;
(ii) trial balance or its equivalent; and
(iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be.”
Further, the Instruction issued by CBEC in this regard provides as under:
"… A new Rule 5A has also been incorporated in the said Rules to prescribe that an officer authorised by the Commissioner shall have access to any premises registered under the Service Tax Rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue and that the assessee shall provide, on demand, the specified records including trial balance or the equivalent. It may be noted that this rule does not envisage issue of any notification by a Commissioner for such authorisation of officers. The requirement of authorisation could be fulfilled by issue of an office order.
2. In this regard, it is clarified that records/documents required to be maintained under various laws such as the Income Tax Act, Companies Law the CENVAT Credit Rules, 2004, VAT and other State legislation would be acceptable, and the amendment made in the rule does not cast any additional responsibility on taxpayers in terms of maintenance of records.
3. The list of records, as required to be provided under said sub-rule (2) should be submitted once only. Once filed, further intimation would be required to be given only in case there is any change in the list (i.e. addition, deletion, modification in the types of records maintained) that had been furnished by the assessee.
4. A copy of the list furnished by the assessee would be sent by the jurisdictional superintendent to the audit section.
5. The audit team or any other officer authorised by the Commissioner to visit the registered premises of an assessee shall give prior intimation to the assessee along with the list of documents that he requires for the purposes of scrutiny, verification or audit.
6. That taxpayer shall provide the records as required by the authorized officer within a period of fifteen days from the date of request. In case, the taxpayer is unable to produce any of the records called for within the stipulated time, he shall intimate the same along with reasons, for non-production of records, and the officer may also further time for production of such records keeping in view the overall facts into account.
7. These amendments have been made in the service tax rules to enable the duly authorised offices to carry out audit or scrutiny as may be necessary to safeguard the interest of revenue. However, it may be ensured that only such records are demanded which are necessary for conducting such audit scrutiny or verification."
Power of Audit under the Finance Act: The only provision in Chapter V of the Finance Act on scrutiny and audit of records of the assessee is under Section 72A of the Finance Act, which reads as under:
"72A. (1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as ''such person''),-
(i) has failed to declare or determine the value of a taxable service correctly; or
(ii) has availed and utilised credit of duty or tax paid-
(a) which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or
(b) by means of fraud, collusion, or any wilful misstatement or suppression of facts; or
(iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner.....”
Only in the specified circumstances as mentioned under Section 72A of the Finance Act, supra, the Commissioner may direct such person to get his accounts audited by a Chartered accountant or Cost accountant nominated by him, to the extent and for the period as may be specified by him.
Contentions of the Department:
The Revenue argued that Rule 5A of the Service Tax Rules was made pursuant to the power conferred under Section 94 of the Finance Act and not pursuant to Section 72A of the Finance Act. Further, the Revenue also contended that the Rule is also justified by invoking the provisions of Service Tax Audit Manual as the basis for ordering an audit.
Rule 5A(2) of the Service tax Rules is ultra vires the provisions of the Finance Act:
The Hon’ble Delhi High Court held that Rules only give effect to statute’s provisions and intent and cannot be used to create substantive rights, obligations or liabilities that are not within the contemplation of the statute. Further, the only audit within the Statute is as mentioned under Section 72A of the Finance Act, i.e. a Special Audit, when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. Accordingly, Rule 5A(2) of the Service Tax Rules cannot provide for a general audit of the assessee and is ultra vires the rule making power conferred under Section 94(1) of the Finance Act.
Further, the Hon’ble Delhi High Court also held that the Service Tax Audit Manual is merely an instrument of instructions for the service tax authorities and do not have any statutory force. Therefore, Rule 5A(2) of the Service Tax Rules cannot be justified on the basis of the Service Tax Audit Manual.
The Instruction regarding Audit by Department is contrary to the Statue:
Further, it was held that the Instruction is also ultra vires the Finance Act since executive instructions without statutory force cannot override the law. Consequently, any notice, circular, guideline etc., contrary to statutory laws cannot be enforced since the parent statute in this regard, the Finance Act itself does not authorise a general audit of the type envisioned by the impugned Rule 5A(2) of the Service Tax Rules, and furthermore only stipulates that a Special Audit can be undertaken if the circumstances outlined in Section 72A of the Finance Act are fulfilled. The Hon’ble High Delhi Court finds that the Instruction is not only an attempt to widen the scope of the law impermissibly but also is patently contrary to the Statute. The Instruction, to the extent it provides clarifications on Rule 5A(2) of the Service Tax Rules, pertaining to Service Tax audit, is quashed.
Important to Note:
It will not be out of place to mention that recently, the Hon’ble Allahabad High Court in the case of ACL Education Centre Pvt. Ltd. & Ors. Vs. Union of India [2014-TIOL-120-HC-ALL-ST] has held that the Audit under service tax is to be conducted by Chartered Accountants/ Cost Accountants only and not by officers of the Department.
Further the Hon’ble Calcutta High Court in the case of SKP Securities Ltd. Vs. DD (RA-IDT) & Ors. [2013-TIOL-38-HC-KOL-ST] has held that no audit of private assessee can be undertaken by CAG.
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